Startups and angels: Along the way to success

Startup Success in Silicon Valley

I've found a couple of links to "Startup Success 2006," a video of a Silicon Valley panel discussing what it takes to be a successful startup today.   Panelists include:

• Lauren Elliott, Founder, Personal News Network

• Reid Hoffman, Co-Founder and CEO, LinkedIn

• Joe Kraus, Co-Founder and CEO, JotSpot

• Daniel Mattes, Co-Founder and CTO, Jajah

• Alex Welch, Co-Founder and CEO, Photobucket

It's worth the 90 minutes it takes to watch.  Here's the link: Startup Success 2006

For those of us who are time-deprived, Dharmesh Shah, (whose blog I really like: onstartups.com) has done a great summary:  Dharmesh Shah.

Helping Startups Get Growing

A lot of us  seem to continually be asking how to help early stage entrepreneurs get going.   

Of course, we expect early opportunities to be incomplete.  They often have a compelling product concept, but most of us are not deeply knowledgeable about the specifics of a proposed market and often, truth be told, the venture isn't either. 

Lately, I've been talking to technology entrepreneurs who want to be able to spin-off an idea - a very difficult task, to be sure, but not impossible - look at all of the technology transfer coming out of universities.   (A Tech Transfer VC I know, tho, always says, "No garage science," meaning non-academic inventors carry a high risk of not knowing the scope of the science, and therefore can get blindsided.)

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Here's an article from the Milwaukee Journal Sentinel about a local company with a spin-off idea: Brandt Innovative Technologies.  It strikes me that a perfectly legitimate investor position is "the problem is that Brandt isn't focused on (this product.)"   After all, if an angel sees him or herself primarily as a screener, then the investment opportunity skill is primarily about interpreting plans and making judgments about levels of risk and reward.  Most of the angels I know think that way. 

Now I have yet to talk to Kurt, but I think there is an alternative way for an investor to approach ideas like this.

If the idea/venture "checks out," why not treat it more like a technology transfer opportunity?  Can angels help put together the components required for it to be successful?   That's a tall order - the angels need a lot of talent and a darn good rolodex.  But it's also one way to develop deal flow and use the skills and talents of the people in the network. 

Perhaps early stage pre-investment incubation belongs somewhere else; our group's track record has been so-so in trying to help companies get going.  But it is an approach worth thinking about.   

Growing Entrepreneurial Ventures

I am thinking about developing some sort of entrepreneurial business seminar/development program (or have it shot down by good research that demonstrates there is no need).

I'd like your help in thinking this through.   So, if you would, please read this post and send me a comment - here is fine - or by email.

There are already many programs in the Midwest that seem to focus on quick hits at a variety of levels.   In other words, all kinds of organizations do a several hour, half day or full day session on lots of topics.   

Way at the other end, there are classes that are traditional one to many programs held on some regular interval over a longer period of time – 6 weeks – a whole semester – or more. 

There are many web learning opportunities of one sort or another. 

What I have seen frequently are entrepreneurs who need help individually developing their plan for success.  They show up on my doorstep because they think they need funding to succeed (and usually to take the next step) – and some do.  Most need planning assistance based on experience.  Business consultants frequently fill this gap.  However, those that are willing to work with startups are sometimes either very expensive or not very good, or both.  Of course, there are great examples of this working well, like Randy Komisar. (The Monk and the Riddle)

There are several examples of “investors” that have run some sort of modified summer camp program.  (See  "Smartups"  by Bob Ryan as one example.) 

The open question – is there a need in the Midwest for some sort of program – perhaps part in-person (a weekend?) part online community – that would fill a need that (some) entrepreneurs (might) have? 

The initial thought is to work at an individual level on major topics to begin with – the plan, the market map, people – and so forth.  And then perhaps to branch (or morph) into areas of specific interest to participants.  It might kick off with a weekend of workshops, maintain an online forum for a month or so, then reconvene, then back to the forum, etc.  I wonder if this would really help provide advice and support as well as networking for participants.

Its cost would be less than a consultant but more than a seminar and its value would be in developing the business plan sufficiently that the entrepreneur could obtain a clear picture of the market and the hurdles presented to the business. 

Companies would be selected on some sort of application (?) process and the group in each seminar would be limited to four or five companies.  It might be possible that companies from across various seminars might network together.  Would this look a bit like VC portfolio company networking? 

So, dear reader, please HELP.  Let me know:

1.    Is this an idea worth pursuing, or is it “been there, done that”?
2.    What topics, structures, etc. would be most helpful to entrepreneurs?
3.    Other recommendations?

Comment below or email here: [email protected]

Learning from Failure

Here's a great post from John Battelle  on the "Failure to Fail," a must read.  It's interesting that the perspective here (easy money available, and lots of short term enthusiasm) produces venture capital firms keeping companies alive who ought to fail for lack of a good idea or good execution.

Is there any way to begin to learn something from this process to increase the odds of a successful launch? 

On the one hand, venture firms need to be able to move a lot of money into their portfolio companies.  They just have such large funds that it becomes uneconomic to deploy them in small amounts.  So, ventures with credible teams, markets and ideas, so the theory goes, get funded for relatively large amounts to take their concept to market.  (Sound familiar?)

At the same time, in the very early stages of a startup, the entrepreneur is betting on time to market (first mover advantage) being critically important.  These two hypotheses combine to create a venture where the testing of risks and assumptions is done on a grand scale to accelerate time to market.  And often, those "tests" are really one test without an alternative, or a "Plan B." 

It is not possible to create new value without assuming risk, of course.  Whenever we start a new venture we take on risk - and the task of managing it intelligently.   But is there a way to do it differently?   

When All Else Fails...Manipulate The Data

I saw that on a t-shirt worn by a bartender at the Milwaukee Irish Fest last night.  I have no idea why.  But I liked it and it got me thinking about entrepreneurs and investors.  Who is responsible when investors encourage entrepreneurs to "manage" the data? 

If my process of reviewing a business plan helps the entrepreneur to align the performance plan with my growth expectations and then to base the plan on a "reasonable" set of assumptions that subsequently prove to be optimistic, who is to blame?  Said another way, how do we both avoid doing this again?

Can you think of the whole process of due diligence not primarily as a verification of high growth process but perhaps as a joint learning activity?  Do we as investors owe an entrepreneur not only our courtesy and respect but also our active participation in the mutual discovery process about assumptions, markets, and so forth?

As the venture progresses from financing to revenue (whether financed by an investor or the entrepreneur) that first big, critical issue has to be the first miss on projections.  Will it happen? Yes. 

If the venture leaders keep rolling forward on the projection, without really determining what is going on, they have begun a process of convincingly telling themselves and their constituents that the projection and forecasting process is unimportant.  Risk at this point increases - a lot.   

So, I believe that the diligence process is really about learning together and developing not only projections that are reasonable, but also a way to stress test every one of our assumptions, paying real attention to the ones that, if wrong, will kill us. 

The inevitably of rolling forward on projections is a given.  What the entrepreneur needs to do is be able to be testing the underlying assumptions and reducing risk.  This starts with the process of understanding and explaining the business plan.

If, at the end of this process, it is clear to the entrepreneur and the potential investor that the business will not support high risk capital and its expectation of high returns, both parties win.  The entrepreneur has a better understanding of the business model and whether it really can be high growth.  She may also find better ways to finance the venture to better meet her own goals. 

Listening to Entrepreneurs

The consistent feedback each semester during my "New Venture Formation" graduate class is that the guest speakers were the highlight of the course.  So I was pleased when someone sent me this link to a terrific collection of high profile guest speakers from the Stanford technology ventures program, from the Stanford College of Engineering.

The most recent talk, by Joel Peterson, provides real insight about negotiating.  I've subscribed to the series through iTunes that will keep my iPod updated with these talks.  (I'll have to work my way back through the 25 hours of previous talks out there.) 

 

Stanford Entrepreneurial podcasts

Do You See The Big Picture?

More and more, I am coming to the conclusion that the ability to see the big picture - to understand the venture process systematically - is one of those critical factors in the entrepreneurial manager's toolkit.

This has led me to thinking about the difference between experts and others.  How does one person become an expert?  And what characteristics of experts are present that might be discerned by an investor considering a business plan?

One of my colleagues at Babson College, Jeff Timmons, often talks of the "50,000 chunks" of knowledge entrepreneurs need to acquire to become experts in entrepreneurship.  What he's hearkening back to is a 1960s study by Simon and Chase at Carnegie Mellon who were studying expert theory by using chess grandmasters. 

Their conclusion was that these chess masters have learned pattern recognition through their extensive experience and this has led to their success.  These chess experts could recall 50,000 to 100,000 chunks of pattern data about chess, and that they had assembled a series of events into one "chunk."

Jeff is implying that experience in entrepreneurship imparts pattern recognition skills that make subsequent decision making faster and more accurate.

So, an entrepreneur who is an expert sees particular business issues as systems and subsystems, according to this idea of chunking theory.

What does that really mean?

Look at valuation and all of the impact it has on ventures as just a single example.

At a base level, a person unacquainted with the idea of valuation will have to learn each individual component in the chain.  What is the meaning of EBIT?  How is it calculated?  Why is it important?  It is a long, tedious journey starting from this point.

At the next level, our person may begin to grasp the mechanical calculations that make up valuations (of various kinds - more complexity!) and may begin to grasp simple computations.  However, this rudimentary knowledge will not be adequate to envision the effect of valuation on a new venture.

Way at the other end of the spectrum, an expert understands the absolute interaction between the components of valuation.  The whole process - from comparing a company's proposed performance to market values for achieving it,  to seeing the future prospects of the company opening up or being restricted by the proposed valuation in relation to the market, the risk the venture's leadership is taking in retaining their positions relative to the valuation value (because of the impact of missing on the growth that drives valuation, for instance), as well as the likelihood of attracting future investors - all are instantly apparent to the expert.

As another example, consider the process of understanding market competition. 

An expert will not only be able to  map the market   and understand each competitor's particular characteristics, she will be able to describe the importance of the competitive process, and the likely competitive reactions and outcomes that will result when each competitive company has a particular set of resources, customers, and products.  A classic example of this kind of expert system is Porter's Five Forces  analysis. 

It takes endless hours of experience to become an expert, usually amassed over years.  At least that's my bias.  And putting in the time doesn't promise results.  You have to be willing to work at learning in every situation you find yourself.  Remember Bill the golfer?

The old saw about having one year of experience repeated twenty times - as opposed to twenty years of experience - is a comment about our willingness to work to see new patterns.   

When Esther Dyson says "always make new mistakes," this process of learning is what she is talking about.

So, when investors talk to entrepreneurs about their business, they are often testing as well as learning.  Are they experts in the product?  In managing market strategy?  Where has their experience come from?  What have they likely learned?  Where are the gaps?  Are they aware of them? 

How many chunks have they mastered?

Intellectual Property and the Startup

A really basic question in looking at any business plan is the potential to protect the intellectual property underlying the business concept and/or process.  If there is protection available, it may offer some lead time or competitive advantage for the business to grow.

We had a key patent in our software startup that issued in January, 2001.  (It's 6,182,060.  You can look it up here: Patent Office Link )  I don't think we were ever sure that others in the industry didn't infringe it, because the fishing expedition that would've made the case was unbelievably costly.  In some ways, in this example, we may have been better off with "trade secret" protection (like the famous "Coke formula.") 

The difficulty that surrounds protecting an issued patent, after having gotten one in the first place, is an important area for entrepreneurs to understand.  In our case, not only did we have to make decisions about the extent to which we would go to protect our patent, we also had to decide about filing for and enforcing the patent around the world. 

The whole topic of worldwide patents, filed country by country, is complex.  A product that is protected by a patent only in the US can be made and sold outside the country by someone else (if a foreign patent is not filed) but not made or sold by that party in the US, I believe.  In the case of software, especially being delivered over the web, the idea of protection and infringement becomes even more complex - and costly. 

And, in the first place, certain premature disclosures "in public," or failing to file promptly, can invalidate the application itself. 

But, all of that having been said, IP protection continues to be an absolutely critical requirement for startups.  So, entrepreneurs need a thorough understanding of the topic.  Thankfully, here's a place you can do that.

I just got done reading the new IP articles at the eVenturing blog.  If you are in a venture that has the potential for IP protection, you will want to read them carefully. It's a terrific collection.  Find them here:   All About IP.

Venture Voice Podcasts

In case you have not yet seen this, it is a website that has an archive of now about 35 podcasts of interviews with well known entrepreneurs, VCs and others.  If you're as addicted to the podcast thing as I am it's a place to browse and find interesting interviews.

Check it out.

venture voice podcast entrepreneurial interviews